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Paper Cuts

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Paper seemed to be the least of publishers' problems last spring. The industry had seemingly stabilized but then fell off the precipice. Almost 1 million tons of paper were removed from the system almost overnight when UPM, Fraser and Tembec all shut down mills.

"This business was never operated rationally. Peaks and valleys, peaks and valleys. And right now we're at the bottom of the Grand Canyon," said one paper broker who works with numerous publishers and asked not to be named.

Due to the closures, the remaining mills had more orders than they could handle. "Demand hadn't spiked," said Gerry Chisholm, VP at Gould Paper, a distributor. "Supply had been interrupted so they could charge more. So it went up in July, and it'll go up in October."

And even more increases could be coming next year, as pulp, chemical and energy prices all continue to rise.

Prices went up $3 per hundredweight on average in July and will do the same in October, according to Mike Bennett, a sales executive at paper producer Bulkley Dunton Publishing Group. "I think the paper market has been down for so many years, publishers understand the other side of it," he said. "They may not be happy about it, but they at least understand where it's coming from."

Brokers' fears

There is a fear among brokers that the price increases will spur some publishers to shutter print titles and cataloguers to emphasize online orders. "This correction on the demand side has long been anticipated, and it's been kind of a poker game on the part of the producers, of who will blink first," Chisholm said.

"Increased paper and postage costs could kill some magazines," said Keith Hammerbeck, director of manufacturing services at Advanstar Communications. "I am sure that a lot of publishers are looking for ways to move editorial content and advertising from borderline magazines to the Web."

The overall decline in demand for paper is here to stay, said Dedra Smith, president of printing consultant Printmark West, who serves as a paper adviser to many of her clients. "There is a shift among all periodicals to other media that may find a slowly growing snowball of titles that will shift to a digital-only format, though by no means all magazines will go in this direction," she said.

How that trend will affect paper prices over the long run is impossible to project and will depend on how demand falls, Smith said. Paper companies will try to stay ahead of the trend and cut their losses, and some will get out of the publication paper market altogether, she said.

"It's a case of everyone getting hurt," Smith said. "Winning strategies will just be about who gets hurt the least."

Mills barely surviving

What worries Chisholm and his counterparts are the number of mills still barely surviving. The three closures created plenty of work for others, but the price increases still haven't stanched the bleeding, particularly for smaller papermakers. "What we don't know is how many mills closed down one or two machines or are constantly feeling like they're only 60 days away from closure," Chisholm said. "I hate to say it, but it's true."

Bennett agreed. "These increases aren't guaranteeing that these places are making very much money," he said. "Some are just barely back in the black again, and some might not even be that."

A major concern, said the paper broker who wished to remain anonymous, is that advertising in magazines will continue to decline: "There are so many options for advertisers right now, thousands of special-interest television channels and Web sites. That's a big problem. It's going to be very difficult, and it'll be very sad."

The broker said mills need to shut down more machines and keep demand high in order to keep making more dollars. "If they don't make some money, they'll just keep dying," the broker said.

Bennett is hopeful that papermakers won't present any more increases until next April. "They just got six bucks in the last few months, so maybe they'll let it sit there and see how the first quarter goes," he said. "Publishers can hope for that, anyway."

But if additional capacity comes out of the market, prices will likely go up again in January, Chisholm said.

Ascend Media's Fogarty said he expects paper prices to go up 7% in January and another 7% in July. "[The paper market] is going to continue to be extremely tight through the fourth quarter," he said. "Mills will go on allocation to keep printers and publishers from adding excess inventory.

"The continued tightening of the marketplace will force publishers and catalogs alike to take a hard look at how many magazines and catalogs they print and put into the mail. Tightening of folios and monitoring of ad/edit ratios will be a cost-control measure."

Still, some production executives remain optimistic: "Longer term, I think paper prices will be fairly stable, with minor ups and downs," Advanstar's Hammerbeck said. "Consolidations will help drive some costs out and make the mills more profitable. I don't see any large increases because that could really hurt the industry."